German finance minister does not build castles in air

PROFILE:Wolfgang Schäuble has reputation for plain speaking and an unshakeable belief in a united Europe

LAST JANUARY in Berlin, Minister for Finance Michael Noonan was full of praise for his German counterpart. “The thing about Wolfgang is that he talks sense,” said Mr Noonan after a meeting in the finance ministry.

In an August interview with this newspaper, the German minister was similarly complimentary of his Irish colleague eight months his junior.

Despite this good working relationship, however, the recent fraught week in bilateral relations means the ministers will be cautious when they go before the press today. Mr Schäuble knows that, in Dublin this morning, he can’t win. If, as is likely, he praises Ireland’s reform efforts, the German visitor risks being perceived as patronising.

But a blunt restatement of his tough line on Ireland’s so-called legacy bank debt would leave bilateral relations in a worse state after his short visit than before.

Ahead of their bosses’ meeting on Thursday in Berlin, Mr Noonan and his Berlin guest will repeat the week-old statement issued to defuse the bank debt row, underlining without elaborating on the “unique circumstances” of Ireland’s “special case”.

The statement was an attempt to calm tempers and restore the deliberate ambiguity of the June deal which left open what, eventually, would be politically and financially possible to assist Ireland. Ahead of today’s meeting, however, there is no longer any doubt or misunderstandings of where each capital stands.

Ireland perceived the first part of the June 29th euro group statement – the political agreement to sever the link between bank and sovereign debt – as being elementally linked to the second part of the statement, agreeing to revisit Ireland’s programme with a view to improving its sustainability.

Germany disagrees fundamentally with this reading, saying the statement kept apart the two issues. Allowing the new European Stability Mechanism bailout fund to act as a bad bank for Irish debt was never on the table, it argues.

“You cannot open a new store and have it overwhelmed with burdens from the past,” said one German official. “It only makes sense to have a clear slate, not to be responsible for the national regulator failings of the past.”

Given what it saw as serious misunderstandings and misplaced expectations on this issue, Berlin officials decided it was dangerous to allow the June ambiguity to continue. Mr Schäuble told this newspaper in August that Berlin would not agree to any debt relief measures that might spook financial markets. A month later, he stepped up the megaphone diplomacy and teamed up with his Dutch and Finnish colleagues to rule out ESM funding for legacy debt, even when a new European banking regulator opened the door to bank recapitalisations.

Chancellor Angela Merkel’s repeat of the line in Brussels last Friday week was Berlin’s final word on the matter.

A contributory factor to last week’s German-Irish stand-off is a difference of opinion on who shattered the ambiguity of the June deal. While Irish officials blame the Finland statement, German officials recall Irish officials were talking up the likelihood of a deal on legacy debt long before then.

At today’s talks, both sides have agreed to differ. Mr Noonan wants to focus on the promissory note issue, leave bank recapitalisation alone and see how things develop politically. This, Berlin officials say, suits Germany side just fine. Officially, the European Central Bank is in charge of the promissory note discussions but Berlin says it has no real problem with the principle of stretching the debt over, say, 40 years.

But they are loath to let sleeping dogs lie. Ahead of today’s talks German officials made clear they are not impressed by the Irish argument that Dublin deserves a debt deal after “taking one for the team” – yielding to ECB pressure to accept a bailout to prevent an Irish bank collapse destabilising the euro zone.

Berlin officials argue that light-touch regulation line left Ireland’s financial sector riddled with grenades. Dublin cannot expect thanks from European partners for not pulling the detonating pin.

Battle-weary Irish officials say such hardline views are in keeping with the crisis orthodoxy, largely shaped by the Berlin finance ministry and Mr Schäuble, a 40-year political veteran. “Whoever knows Wolfgang Schäuble knows that he doesn’t build castles in the air but says what’s possible and what’s not,” noted Merkel on his recent 70th birthday.

After a career crowned by his shaping of German and European unification. Schäuble’s bottom line in politics is his unshakeable belief in European cohesion.

“My brother will not put up with new borders in Europe,” said Thomas Schäuble, the minister’s younger brother, in a recent biography. “For those who currently criticise his European politics, that’s something worth considering.”